U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20824 / December 11, 2008
Securities and Exchange Commission v. Citigroup Global Markets, Inc., Civil Action No. 08 CIV 10753 (RMB) (filed on December 11, 2008); Securities and Exchange Commission v. UBS Securities LLC and UBS Financial Services Inc., Civil Action No. 08 CIV 10754 (filed on December 11, 2008)
SEC Finalizes Auction Rate Securities Settlements With Citigroup and UBS Providing Nearly $30 Billion in Liquidity to Investors
The Securities and Exchange Commission today finalized settlements with Citigroup Global Markets, Inc. (Citi) and UBS Securities LLC and UBS Financial Services, Inc. (UBS), that will provide nearly $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February.
The settlements resolve the SEC's charges that both firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed and sold. Previously, on August 7 and 8, 2008, the Commission's Division of Enforcement announced preliminary settlements with Citi and UBS, respectively.
According to the SEC's complaints, filed in federal court in New York City, Citi and UBS misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms' balance sheets. The complaints allege that Citi and UBS failed to make their customers aware of these risks. In mid-February 2008, according to the complaints, Citi and UBS decided to stop supporting the ARS market, leaving tens of thousands of Citi and UBS customers holding tens of billions of dollars in illiquid ARS.
The settlements, which are subject to court approval, will restore approximately $7 billion in liquidity to Citi customers who invested in ARS, and $22.7 billion to UBS customers who invested in ARS.
Without admitting or denying the SEC's allegations, Citi and UBS agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings, some of which are set forth below.
The Citi settlement provides, among other things, that:
The UBS settlement provides, among other things, that:
The Commission alerts investors that, in most instances, they will receive correspondence from Citi and UBS, and that they must advise the respective firm that they elect to participate in these settlements, or they could lose their rights to sell their ARS. Further, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special FINRA arbitrations.
Both Citi and UBS will also be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act of 1934, which prohibit the use of manipulative or deceptive devices by broker-dealers. Both firms also face the prospect of financial penalties to the Commission. After the buy back periods are substantially complete, the Commission may consider imposing a financial penalty against Citi and/or UBS based on the traditional factors the Commission considers for penalties and based on whether the individual firm has fulfilled its obligations under its settlement agreement.
The Commission notes the assistance and cooperation from the New York Attorney General, the Financial Industry Regulatory Authority (FINRA), the Texas State Securities Board, and the North American Securities Administrators Association (NASAA).
The Commission's investigation of the auction rate securities market is continuing.